Association between Degree of Leverages and Firm Value

  • Pradeep Kumar Gupta LM THAPAR SCHOOL OF MANAGEMENT THAPAR UNIVERSITY
  • Shailendra Kumar
  • Piyush Verma
DOI: https://doi.org/10.5296/ajfa.v8i1.9455

Abstract

This study aims to empirically investigate the association between degree of leverages, operating and financial, and firm value in the context of India, one of big ten emerging markets (Garten, 1997). This study examines this association for 231 manufacturing firms listed in National Stock Exchange (NSE) in India over a period from 2001-2002 to 2010-2011. The independent variables, degrees of operating and financial leverage, and a market price-based dependent variable, called price-earnings ratio as a proxy of firm value, are taken to examine this relationship by using standard ordinary least square regression models at the levels of individual firm and portfolio of firms. The findings of this study show a statistically significant negative relationship between firm value and degree of operating leverage and a statistically insignificant relationship between firm value and degree of financial leverage both at the levels of individual firm and portfolio of firms. Using the data from a country like India, one of fastest growing emerging markets in the world, this study provides an important insight on the effect of leverages on the firm value, the association between independent accounting variables and stock price-based dependent variable, to the practitioners, the scholars and the finance managers. 

Author Biography

Pradeep Kumar Gupta, LM THAPAR SCHOOL OF MANAGEMENT THAPAR UNIVERSITY

Pradeep Kumar Gupta, a Science Graduate, an MBA (Finance & Control) and a FDP-IIM Ahmedabad alumnus, is presently an Assistant Professor of Accounting and Finance in L M Thapar School of Management, Thapar University, Derabassi Campus. He is qualified National Eligibility Testing (NET) of UGC in Management and has seven years of teaching, research and consultancy experience and five year industry experience in commodity market, accounting and auditing field. Research interests in leverage analysis, mergers and acquisitions, value relevance of accounting information and corporate governance. He is also a recipient of an Award from Amar Ujala B-School Excellence Awards in 2012 for Best Teacher in Financial Management. 

Published
2016-05-23
Issue
Vol. 8 No. 1 (2016)
Section
Research Articles

Submission of an article implies that the work described has not been published previously (except in the form of an abstract or as part of a published lecture or academic thesis), that it is not under consideration for publication elsewhere, that its publication is approved by all authors and tacitly or explicitly by the responsible authorities where the work was carried out, and that, if accepted, will not be published elsewhere in the same form, in English or in any other language, without the written consent of the Publisher. The Editors reserve the right to edit or otherwise alter all contributions, but authors will receive proofs for approval before publication.

Copyrights for articles published in MTI journals are retained by the authors, with first publication rights granted to the journal. The journal/publisher is not responsible for subsequent uses of the work. It is the author's responsibility to bring an infringement action if so desired by the author.